Wednesday, October 27, 2010

In the midst of the ongoing stalemate between Cablevision and Fox over the cost to retransmit the local Fox TV stations in New York and Philadelphia, I thought it’d be interesting to take a closer look at what's going on behind the scenes. In the current standoff, Cablevision is refusing to pay the more than double their current fee as requested by Fox. There is nothing preventing programmers from demanding unreasonably high rates and threatening black outs.

I decided to read up on some of the investor presentations that some publicly traded broadcast companies have used to update Wall Street on their performance. Many of these presentations are available online, providing detailed information about a broadcaster, its earnings and plans for future revenue growth. Because nearly every broadcaster has identified retrans as a growth area for their business, there's usually several slides about their experience and forecast to increase those fees in their investor presentations.

Here's what I found.

Sinclair Broadcating is the largest operator of local television stations and affiliates in the United States. They run over 50 stations across the country, reaching 24% of American households. Their operating footprint includes stations in Columbus, Cincinnati, and some parts of Kentucky.

In May of this year, representatives of Sinclair presented a comparison at the Jeffries Internet Media and Telecommunications Conference about their current retrans performance against projections they made in 2003 for retrans revenue.

This means that in 2003 Sinclair forecasted the amount of revenue they should draw from retransmission fees. Seven years later, their discussions with satellite and cable providers have yielded a 300% to 400% windfall over the original estimate.

That's good news for Sinclair stockholders - which is why Sinclair executives took pains to point it out in their presentation - but it's bad news for customers every month when they pay the local broadasters through their higher cable bill. And when every broadcaster is aiming to triple and quadruple retransmission revenue every seven years, it puts dramatic upward pressure on the price of basic cable.

What about other broadcasters?

Nexstar Broadcasting Group is another large operator with roughly 50 stations across the nation. Nexstar executives gave a presentation to Barclays Capital in March that showed a 68.5% increase from 2008 to 2009 in retransmission revenue. They predict 2010 negotiations will result in “substantial double digit growth.” The numbers are astounding. In 2008, Nexstar brought in $3.9 million in Retransmission Consent Fee Revenue. Just one year later, that revenue increased to $6.4 million. Give them a few more years at that rate, and Nexstar will be turning in the triple digit growth that Sinclair talked about.

Media General, which owns 18 television stations, told UBS in December 2009 that they pushed their retransmission fees from $7 million in 2008 to $16 million in 2009. At that time, they estimated an increase up to $18-19 million for 2010. If they met their $19 million goal, that would represent a 270% increase in just two years.

If I'm paying for this, how do the broadcasters get away with triple digit retrans fee increases?

Unfortunately, under the current retransmission process broadcasters have the right to demand double digit and triple digit increases when an agreement comes up for renewal. Of course, cable providers can say no. But one only needs to look to the current standoff between Cablevision and Fox to see what happens when a cable provider stands up to a broadcaster in an effort to negotiate a lower rate. The broadcaster can pull the signal right when the World Series begins, an event that they have secured exclusive (monopoly) rights to.

However, negotiating carriage renewals while an exclusive right to air the World Series is being used as leverage is fundamentally a flawed process. Remember, huge increases in fees that end up getting passed on to customers represent an unfair, anti-consumer result.

Comments

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But don't you think most pay-tv consumers would do the same? Then those other cnhnaels become obsolete, which is fine for consumers, but not necessarily the television industry itself. This is doubtful to happen until TV is truly in dire straights (might be soon, might be not)

Ugh, sounds like Fox knew cablevision was in a rough spot with the playoffs going on and tried to extort them, Cablevision called their bluff and everyone feels the pain..... 200-300% increases, dear lord. Even the 68.5% increase is excessive. I feel for the cable companies, they are the ones that take the heat from the consumer when they're the ones trying to protect the consumer. They could easily fold to their 300% increase and just carry the cost over to us.

"We need less regulation!"
How many times have we herd this nonsense and people actually buy in to this cr@p.
ALL of us *including cable industry* can expect more cost with this new "pay as you go" democracy shakedown.